The largest U.S. investment banks are bullish about ramping up revenue from mergers and acquisitions in 2017, despite lackluster deal-making during the waves of market upheaval that marked last year.
JPMorgan Chase (JPM) , which sees the groundwork for a solid year in the business, placed first in the total number of announced deals on which its advisers consulted in the 12 months through December, according to league tables compiled by The Deal, a sister publication of TheStreet. The tables ranked investment advisers on transactions of $100 million in which at least one party was based in the U.S.
Morgan Stanley (MS) came in second, Goldman Sachs (GS) third, Bank of America (BAC) fifth, and Citigroup (C) seventh. London-based Barclays (BCS) was fourth, and Zurich, Switzerland-based Credit Suisse (CS) was sixth.
In the last three months of 2016, investment-banking revenue, which includes deal-advisory services as well as underwriting of stock and bond offerings, dropped about 12% to 15% at the largest U.S. banks, reflecting challenges from the contentious U.S. elections to confusion about how Great Britain might separate itself from the European Union and stepped-up antitrust enforcement by the outgoing Obama administration.
"When you look at M&A, the most important driver is corporates looking to acquire or divest," Ken Leon, an equity analyst at CFRA Research, said in a phone interview. "A second component is related to sovereign or private equity looking to buy companies."
Such decisions can be heavily influenced by broader economic factors, and optimism about the pro-growth policies of President Donald Trump, a real estate mogul and author of The Art of the Deal, has boosted the outlook for this year. Trump has pledged to lower corporate taxes, which would free up cash for transactions, while loosening financial regulations enacted after the 2008 crisis and increasing government spending to buoy the economy.
"We're optimistic about a solid M&A market, with the continuing trend of fewer mega-deals but nevertheless good flow," JPMorgan CFO Marianne Lake said on the New York-based bank's fourth-quarter earnings call earlier this month.
JPMorgan Chase advised on 117 announced transactions, according to The Deal's league tables. Revenue from mergers and acquisitions dropped 1% to $2.1 billion for all of 2016.
"The fundamentals for a solid M&A year are there, and obviously there will be puts and takes depending on what happens in the policy and reform space," Lake said. Deregulation of particular industries and tax reforms may be helpful, bank executives said.
Morgan Stanley, which placed just below its cross-town rival with 109 deals, told investors last week that it had a healthy investment banking pipeline for the coming year. Its advisory revenue climbed 13% to $2.2 billion in 2016, partly because of a surge in the fourth quarter.
"We have grown our share in completed M&A and retained our ranking in a market that exhibited resilience in 2016," CEO James Gorman said on the company's earnings call.
"Going into 2017, the overall investment banking pipelines remain healthy," CFO Jonathan Pruzan added. "Capital markets are open and functioning with increased investor optimism post-election. It is too early to tell whether the optimism will translate into conviction, allowing us to pull deals from our pipeline into the market."
Goldman Sachs, the Wall Street firm whose alumni have won several high-ranking spots in the Trump administration, captured third place with 104 announced transactions.
The New York bank closed on several deals in the fourth quarter, including, Procter & Gamble's (PG) $12.5 billion merger of its Beauty business into Coty (COTY) ; Fortis's (FTS) $11.8 billion acquisition of ITC Holdings (ITC) , and Rackspace Hosting's (RAX) $4.3 billion sale to Apollo (APO) .
The company also advised on transactions announced during quarter, including Qualcomm's $47 billion acquisition of NXP Semiconductors (NXPI) , B/E Aerospace's $8.3 billion sale to Rockwell Collins (COL) ; and Capsugel's $5.5 billion sale to Lonza Group.
For the full year, Goldman's advisory revenue dropped 16% to $2.9 billion.
"We see areas that were weak in 2016 having the potential to improve," said CFRA Research's Leon, "including equity trading, equity underwriting (IPOs) and M&A fees that are tied to CEO confidence and the global capital markets." Leon has a hold rating on the company with a price target of $245.
Overall, the investment-banking market is "robust" Goldman CFO Harvey Schwartz, who was recently promoted to co-COO, told investors on an earnings call.
"Dialogue in boardrooms remains quite high for us," he said. "Anytime you have a shift in administrations which may present new policies, that can have an impact on timing of transactions, because it can be a component. But it's really -- it's a timing issue. You know, when you start having discussions around tax policy, tax policy obviously will have an implication for how people think about strategic transactions."
Goldman was followed by Bank of America, which ranked fifth on The Deal's league tables with 84 transactions.
The Charlotte, N.C.-based company, which took over investment bank Merrill Lynch in 2008, said advisory fees for the full year, which include M&A revenue, dropped 15% to $1.15 billion.
The last of the major U.S. banks with a large investment business, Citigroup, ranked seventh on The Deal's tables with 64 acquisitions. The New York-based company's advisory revenue dropped 9% to $1 billion on a full-year basis.
All of the U.S. companies are poised to benefit from a shift away from investment banking by their European rivals, Leon noted. "So whether it's UBS, Credit Suisse, HSBC, or those who have problems that have to do it anyway, like Deutsche Bank, that creates an opportunity for market share gains for the large U.S. investment banks," he said in a phone interview.